10 Big Banks Stocks to Watch In the 'Kitchen Sink' Quarter (Update 3)

Updated with market close information, the downgrade of Bank of America by Credit Suisse, Oppenheimer's upgrade for KeyCorp and downgrade of Comerica, and PNC's announcement on Wednesday morning of several fourth-quarter items.

NEW YORK ( TheStreet) -- Fourth-quarter earnings reports will be quite messy for many of the nation's largest banks.

2012 was a remarkable year for bank stocks, with the KBW Bank Index (I:BKX) returning 30%, after falling by 25% during 2011. Bank of America (BAC) led the way among the 24 index components, with shares rising 110%, following a 58% drop in 2011.

After a bumpy right toward year-end as the fiscal cliff negotiations dragged on in Washington, bank stocks have been strong so far during 2013, as positive economic reports continue to roll in. Investors, however, can expect plenty of first-quarter volatility for the entire market, including the banks, as the arguments rage in Congress over raising the federal debt limit.

Guggenheim Securities analyst Marty Mosby said in a report on Wednesday that during the fourth quarter of 2011, "14 of our 18 Large Cap Banks reported results below market expectations. We expect year-end cleanup decisions to pull down fourth quarter results again." The analyst see some good news for the industry: "Beyond this noise, modest revenue growth, continued efficiency improvements, and deployment of excess capital are creating core earnings growth."

A Lumpy Fourth Quarter Banks Clearing Mortgage Decks

Bank of America has led the way for banks reporting extraordinary fourth-quarter items, announcing on Monday a settlement of its long-running feud with government-sponsored mortgage giant Fannie Mae (FNMA) that will include a cash payment of $3.55 billion and a $6.75 billion payment to repurchase 30,000 loans sold to Fannie before 2008. With some of the costs associated with the settlement having already been reserved for, Bank of America said that the entire Fannie Mae settlement would lower its fourth-quarter earnings by $2.7 billion.

In addition to the Fannie settlement, Bank of America also announced that its fourth-quarter results would be "negatively impacted by approximately $2.5 billion (pretax) for the independent foreclosure reviews, litigation (primarily mortgage-related), and other mortgage-related matters," leaving the company to report "modestly positive" earnings. The company said that its estimated range for additional mortgage putback losses had declined to a maximum of $4 billion as of Dec. 30, from $6 billion at the end of the third quarter.

Following on the theme of clearing out mortgage risk, Bank of America also announced Monday that Fannie Mae, Freddie Mac and Ginnie Mae had agreed to allow the company to sell the servicing rights on 2 million residential mortgage loans, with unpaid balances totaling $306 billion. About 232,000 of the loans with servicing to be transferred were past due 60 days or more. Nationstar Mortgage Holdings (NSM) announced it would purchase from Bank of America the servicing rights for 1.3 million mortgage loans with unpaid balances totaling $215 billion, for $1.3 billion, while Walter Investment Management (WAC) said it would buy servicing rights on 650,000 loans with unpaid balances totaling $93 billion from Bank of America for $519 million.